A step by step guide to cash flow forecasting

At a glance:

The management of cash flow doesn’t have to be difficult, but it requires more than just a few glances at your bank account for business.

Controlling the flow of cash lets you benefit from lucrative opportunities, such as purchasing an item that’s new, hiring additional employees, or making use of the discount.

Getting paid on time is critical to maintaining cash flow , so don’t let your creditors get in the way.

Heads up: looking at your bank accounts once a week isn’t a way to forecast your cash flow.

Small business owners who are overwhelmed by the thought of preparing the cash flow forecast often convince themselves that just a glance at their bank account can accomplish the task.

It’s crucial for small business owners to understand the importance of cash flow forecasting. It’s quite straightforward and, instead of complimenting things, can make running your business easier and your chance at success higher.

We’ve got the best tips for forecasting cash flow as a professional.

1. Understand what cash flow is

Simply put it’s a calculation of cash flow using your transactions into and out and what you are owed and what you have in the bank in cash, less the amount you owe.

Cash flow estimates will give you an exact estimate of how much you have in terms of liquid funds.

The money you pay in will mostly comprised of sales, whereas your payments out will include expenses such as rent, wages, taxes, as well as supplier payments.

2. Learn why it’s important

When you have a handle on your cash flow , then you can manage your business more efficiently and successfully.

Small businesses often have stocks, and they need to know how much stock they should keep in their inventory and whether they can purchase in bulk, for instance.

If you’re not planning your cash flow in a timely manner, you won’t be able to manage your stock in the bank or take advantage of an opportunity that comes your way - discounts on orders like that, or being able to purchase a new asset.

Forecasting cash flows will provide you with an understanding of whether capital expenditure is possible and is warranted at any point, and help use your funds to the maximum potential.

3. Be prepared for growth

When you start out in business it is possible that the changes that come with growth can sometimes creep up on you – including the shift from being able to keep your company running smoothly and then needing to keep an eye on the fluctuation of cash flow.

It’s critical to plan ahead. If, for instance, you don’t manage your cash flow, you might run in a stock shortage and not be capable of purchasing. I’ve also seen corporate owners finance purchase of stock using personal credit cards, which could be a costly cycle that’s hard to come out of.

Planning is crucial in the process of successful financial forecasting.

Think about things like the requirement for additional staff, or seasonal demand for inventory. Be sure to take note of your tax obligations , including PAYE and GST – that’s one area of expense that small businesses get caught out every now and again.

4. You can use the Chase option to make your payments

It is suggested that small-scale business owners collect payments for invoices as fast as they can.

It can be difficult to recover an outstanding payment. Chase instalments that have not been paid promptly instead of let them linger.

Invoices that are not paid can have a serious impact on your business, and can affect everything including the ability to replenish stocks, to having to reduce the advertising budget or branding.

Make sure you know what you’re due by checking in with an annual cash flow plan on a regular basis Each week is the ideal, once a month at minimum. If you’re not sure what’s happening and how they’ll change, it’s impossible to make a proper prepare for what’s coming up.

5. Are you stuck? Don’t be alone.

A majority of accounting software, such as Xero and MYOB offers the capability of forecasting cash flow that business owners can benefit from. It’s a good idea for business owners to stay aware the flow of cash themselves There’s nothing wrong with doing a monthly update with your accountant as part of the process.

Small-scale business owners are often already busy enough. Sometimes their time is better spent on other aspects of their business. Accountants can help organise their forecasting. Consult with your bank’s accountant or business loan provider for help with small business growth issues before they become an issue. It’s best to seek help when you realize you may need it rather than to bury your head in the sand and hope the problems will go away.

There is no need to be an accountant to prepare or oversee the Cash flow projection. But you do need to create it as a regular and constant part of your business planning. In times of uncertainty, such as an outbreak in the world that is now more critical than ever before for small business owners to build resilience into their companies and one of the most effective methods of doing this is cash flow forecasting.